Wednesday, 30 July 2014

Whole Latta Derp

If one of the points of a public broadcaster is to provide basic factual information to voters prior to an election, so that they can then make up their own minds about what policies are the appropriate responses to the current state of the world, then TV One failed magnificently last night with Nigel Latta's infomercial.

He also spent a lot of time talking with poor families about that life isn't exactly easy for the working poor.

Now you can take whatever position you like about the appropriate level of support for the poor and for the working poor, and about the appropriate level of inequality. But, those positions should at least be informed by a basic level of understanding about the current statistics and trends. If inequality has been worsening continuously for the past two decades, that could yield different views about appropriate policy than if inequality has been pretty stable for the past couple of decades. Similarly, if real incomes among the poor have been declining over the past couple of decades, that too could easily yield different views about appropriate policy as compared to a situation where real incomes among the poor have been rising a bit more slowly than among richer cohorts.

I'm not here going to take a view on appropriate policy. But I will put up the baseline facts that should be common knowledge among anybody wishing to have a view as to appropriate policy. This is all from the latest report on the topic from the Ministry of Social Development.

First, as noted last night, inequality has not been increasing. There was an increase from the mid 1980s through the early 1990s, and it's been flat since then. Last night I put up the Gini time series, but that's hardly the only measure of inequality. Let me here quote the Ministry of Social Development report:

Overall, there is no evidence of any sustained rise or
fall in inequality in the last two decades. The level of household disposable
income inequality in New Zealand is a little above the OECD median. The share
of total income received by the top 1% of individuals is at the low end of the
OECD rankings.

That's one of their big bolded summary findings. Inequality is flat, we're hardly out of line for the OECD, and whatever you think about inequality in NZ, it's not being driven by the top 1%.

Here's another graph: the 80/20 ratio. That one says how much more money somebody at the 80th percentile (earns more than 80% of the population) earns compared to somebody at the 20th percentile. AHC is After Housing Costs; BHC is Before Housing Costs. AHC shows a rise through the mid-90s, then noise around a 3.0 level. BHC shows a rise through the early 90s, then a slower rise through the early 2000s, then a drop back to the early 90s level, then noise around a level consistent with the mid-late 90s.

If you like ratios other than 80/20, the paper has a wide set of them, both Before Housing Costs and After Housing Costs. They're all a bit noisy, but they're all basically flat since at least 2001, with some flat since the mid-90s.

And here's that big middle class squeeze: the proportion of total income going to individuals in deciles 4 to 9. The fifty percent of the population in the upper middle class earns about 55% of total income.

Latta focused a lot on wages at different levels rather than the kinds of numbers above. We do have a reasonably progressive tax system with substantial transfers to the working poor. The numbers above reflect the after-tax-and-transfers income at the different deciles. The tax and redistribution system has worked to maintain pretty stable levels of inequality over the last couple decades on a wide variety of measures of inequality. It is a substantial mistake or deliberately misleading to portray things instead as a rising trend in inequality. And since I'm told that the Treasury Chief Executive told Latta, on footage left on the cutting room floor, that inequality was flat, Latta seems to have been wilfully seeking to mislead the public about the basic facts around inequality during an election campaign on a publicly funded television station.

This is not right. Public broadcasting is supposed to at least give everybody the correct basic facts so that voters can then deliberate about how to interpret and deal with those facts in policy choices. When it instead deliberately misleads the public into taking the narrative pushed by the Labour Party, I start wondering why we have a state broadcaster. Public broadcasting isn't supposed to make people dumber.

Enough on inequality. The MSD report also has the basic facts on poverty trends. Latta put up a one-year big increase in incomes at the top end of the distribution during the post-GFC share market recovery as representative of how the poor have suffered from the GFC as compared to the rich. Here's real household income changes over the period by decile:

The very poorest cohort did ok, though much of that was a rise in NZ Super. Things stagnated for the working poor; middle to upper-middle cohorts did fine. Folks in the 9th decile did about as well as folks in the first decile, while those at the very top stagnated.

How about over the longer period?

Over the three decades from 1982 to 2013 different
income groups fared differently over different periods. The net gains over the
last two decades from the mid 1990s to 2013 were similar for all income
groups. Because of this similarity in net gains, income inequality in 2013 was
similar to what it was in the mid 1990s.

Latta was right about one thing though: housing costs have hit disposable incomes of the poor by more than they've hit disposable incomes among the rich. MSD reports that, because of strong increases in housing costs, AHC incomes for households in the bottom two deciles are lower in real terms than in the 80s. But, again, most of the increase in hardship came in the early 90s.

Follow the blue line. This one's defined around 1998 real before-housing-cost incomes. If you were in a household that earned, in inflation-adjusted terms, and after housing costs, less than 60% of median 1998 incomes, you're in the cohort that follows that blue line.

You can see a sharp rise in the early 90s, then a slow drop through 2009, then a hump during the GFC that reverses. Ignore the discontinuity in 2007 that obtains when they rebased the measure. The proportion of low-income households is higher than it was in the 80s but the trend since the mid 90s is basically flat or declining. Is this just me cherry-picking measures? No. You get the same thing on the relative income lines. If you don't like current poverty or inequality rates, that's fine. But they're a "it's been like this for about 20 years" thing, not a "John Key is Evil" thing. The current state of affairs is roughly the same as it's been through many terms of both National and Labour.

And now, same thing again for children in low-income households.

It's hard to pull any worsening trend out of this. There was a big increase in the early 90s, and a fall since then.

Finally, Latta focused a lot on the working poor. The MSD report makes real clear that poverty is primarily among beneficiaries.

Nigel Latta's big beef seemed to be with the reforms of the 1980s. Those reforms did yield a wide range of changes, including to inequality and poverty measures. Latta, throughout the documentary, presented what seemed to be an ever-worsening trend in poverty and inequality. And he seemed to be importing a lot of the American narrative around the top 1%.

Here's the NZ data on the top 1%, both in time series and as compared to other countries, again copied directly from the MSD report:

Individual market income … data from tax
returns – avg of year noted and the one either side

Top 1% share

5.6

8.9

9.0

7.8

7.8

Top 10% share

28

33

33

30

30

Top 10% - 1% share
(ie P90 to P99)

23

24

24

22

22

Income
inequality in New Zealand compared with other OECD countries, c 2011-2012

(%)

NZ

OECD-34
median

DNK

NOR

FIN

FRA

AUS

CAN

UK

US

Gini
x 100 (trend-line)

32.9

30.5

25.3

25.0

26.1

30.9

32.4

31.6

34.4

38.9

Share
ratio, D10 to D1

8.2

7.6

5.3

6.1

5.5

7.4

8.5

8.5

9.6

16.5

Share
ratio, Q5 to Q1

5.2

4.8

3.6

3.7

3.7

4.7

5.4

5.2

5.6

8.2

Share
ratio, D10 to D1-4 (Palma)

1.27

1.18

0.87

0.85

0.93

1.18

1.27

1.19

1.40

1.74

Percentile
ratio, P90 to P10

4.2

3.8

2.9

2.9

3.2

3.6

4.5

4.1

4.1

6.1

Top
1% share – tax records

8

The
latest available from 2009 to 2012

6

8

8

8

9

12

13

19

Top
5% share – tax records

21

17

19

21

21

21

27

28

36

Note further that at least some of the rise in top incomes comes from reporting changes when the tax system was fixed to reduce the incentive to under-report incomes for top earners.

The American narrative around the "1%" simply does not here apply.

Take from all of this whatever policy preferences you want, while thinking hard about the kinds of things Nolan urges you think about. You can't start thinking properly about appropriate policy if your background facts are all wrong. Hopefully this corrects some small fraction of the harm that Nigel Latta did last night. Even better, read the whole MSD report on it.

You're in danger of dancing on the head of a pin here. Two comments (from a non-economist who may be completely off-target, but here goes :))1. Of course the late 80s and early 90s saw the big rise in equality. That's when the policies which cause income inequality were implemented. The promise then was the everyone would benefit - not just the wealthy. But the gap has widened rather than closed since then. 2. Income is a poor measure of wealth. (It's not even clear to me if the 'income' you are talking about about is gross or after tax- because the flattening of taxes has been one of the prime mechanisms at work. And yes, they are still being flattened, vis the recent rise in GST. They are only 'reasonably progressive' by the standards of other English speaking nations since the 80s reforms which saw the wholesale abandonment of the tax systems as a means of redistributing wealth and which, no surprise, ended the 2-3 decades of post-war equality.) Almost anyone with any sort of wealth makes sure most of their increase in wealth year to year isn't 'income' because that's taxable. It's absurdly simple to do. So using Govt income figures to measure relative wealth - especially in a country with no capital gains tax, but there are plenty of other ways - is just silly.

inequality has been increasing substantially;that the rich in particular have done well in recent years;that poverty has worsened;"

Isn't the problem worst than you say. Let us accept, for the sake of the argument, that Latta's three points are correct. Isn't the implication of Latta's argument that the second point caused the third? But as Deirdre McCloskey says, see IEA video at Anti-Dismal, this isn't the case. Therefore we need an explanation as to why inequality as such is a problem. A Rawlsian approach to welfare , for example, would suggest worrying more about the condition of the worst off in society, i.e. a concern with poverty, rather than a concern with the gap between the "rich" and the "poor", i.e. inequality. In addition even if we accept inequality as the issue,inequality in what? Wealth? Income? Consumption? All issues that have to be addressed in any program on this topic.

The bottom decile dropped a bit in real terms, then came back up to being about on par with where it was in the 80s. Note that the figures I'm citing are all after-tax-and-transfer, and some of them are even also after housing costs.

NZ doesn't have public broadcasters... The first thing National did when it came to power in 2008 was remove TVNZ's public broadcasting charter. TVNZ's only responsibility now is to maximise its profits. The Nigel Latta documentary succeeded in that field, it was a ratings hit - winning every key demographic.

Did you notice Latta's claim that "scientific research shows that there is a strong correlation between the levels of inequality and teen pregnancy, drug abuse, suicide, imprisonment and life expectancy". Wrong on all points I'm afraid! Seems he has been taken in by the flawed research which appeared in the discredited publication "The Spirit Level" in 2009.

You're wrong here. There is a strong correlation. The Spirit Level asserted their was a causal relation... and that's what got them in trouble because causality can't be proven. But there is no refuting the correlation.

I have spent many hours working through their data. If you have a copy of the book try covering the outliers (USA and Japan) and you will find that all the correlations on the scatter diagrams disappear except for the indicator for infant deaths. Suggest you read "The Spirit Level Delusion" or see some of the sites addressing the flawed data e.g. http://www.theguardian.com/commentisfree/2010/jul/08/spirit-level-book-critique or read Colin Mills letter (Oxford Sociology) at: http://oxfordsociology.blogspot.co.uk/2012/11/open-letter-to-prof-richard-wilkinson.html Most epidemiologists have distanced themselves from W&P including those I know here in NZ. Good to see that you are interested in exploring this controversy. (Note that copies of TSL have been sitting unsold in bookshops here in Auckland for the past year)

Inequality isn't increasing (according to MSD). If we take two people on retirement: both had the same income but one invested in property and has a couple of rental properties to sell at leisure. There is a likely gap?Also it is claimed that "90% of millionaires get there by property investment" yet the incomes of this group are likely not to reflect their increasing wealth? Or is this urban myth?

Latta claimed inequality in income and wealth inequality were increasing. I haven't seen great time series data on wealth inequality, and much wealth inequality will have come up through the ramp-up in housing prices from the mid 2000s, in which case the appropriate solution is to expand housing supply. In the absence of data, I didn't touch the claims on wealth. But the claims on income are demonstrably wrong.

If we have two retired people, both with the same income, one drawing income from property rent and the other drawing income from a stock portfolio, both would have assets that could be sold at leisure. Housing is lumpier and so it would be harder for the property investor to divest little bits over time, but that's getting easier with reverse mortgages.

I haven't data on the claim on property investment. But where median house prices are topping half a million, it's going to be a substantial part of the wealth of anybody just hitting the million-dollar-portfolio mark.

Are you stupid?Coming from a Television Background, this would add an inappropriate cost to the stations - productions that are made for broadcast are better to do the proper research themselves rather than letting stations change the final work from what they see as 'false' information. This is technically censorship.